How to Prepare and Repair Your Credit for 2014
In the last column, we discussed multiple ways that a home sale can crumble, including problems that arise from a consumer’s credit during the loan approval process. Since the credit crisis, having poor credit is one of the most common ways to kill a deal. With poor credit, a potential homebuyer can be denied a mortgage or receive an unaffordable interest rate. However, bad credit is mendable and not out of a consumer’s control.
Review Your Credit Report and FICO
The first step in deciding if credit damage control is needed is obtaining all three credit reports, which can be found for free at AnnualCreditReport.com, as well as one’s FICO score on myFICO.com. A FICO score measures an actual credit score, which is indicative of financial risk. The FICO score is helpful for determining eligibility for a loan and what rates may be given on a loan. Credit reports are a credit history that can pinpoint where credit can be improved.
Pay Off Delinquencies
When mortgage lenders look for low risk and reliable borrowers, one of the first telling signs is the status of delinquent accounts, which include collections, late accounts and charge-offs.
“Getting rid of those debts on your report is definitely in your best interest,” said Director of Counseling Natalie Lohrenz at the Consumer Credit Counseling Service of Orange County. “When a debt goes to a collection agency, the original creditor has given up, which is a danger sign to lenders.”
Reduce your debt-to-income ratio as much as possible by paying off these accounts on or before the due date and not accruing any further debt. Yahoo’s “How to Prepare for Your Mortgage Application” recommends having no higher than a 12 percent debt-to-income ratio to receive a good interest rate.
Don’t be Afraid to Dispute
Inaccurate charges or false information on credit reports are not uncommon and can severely damage a credit score unfairly. Fortunately, errors can be reported and corrected, although it can be a lengthy process. Review the reports, highlight the errors and make copies of the pages where errors are found. Smart Asset recommends mailing, rather than submitting online, the copies, evidence and explanation to each bureau that is reporting the inaccuracies.
Continue Conscious Spending
Don’t apply for any new credit or purchasing any large items right before or during a mortgage application process. Even after you have been approved for a loan, continue to hold off on heavy spending. Credit reports and scores can still be pulled before your closing date and you don’t want any changes that could cause a lender to change their mind about their approval or rates.